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An article in the current edition of the journal BioSocieties, a publication of the London School of Economics, argues that the real cost of R&D is, in fact, a fraction of the commonly cited estimate and we are having the wool pulled over our eyes.

The authors - Donald Light, professor of comparative health care at the University of Medicine and Dentistry of New Jersey in Newark, N.J., and Rebecca Warburton, a health economist at the University of Victoria - have returned to the source of the original estimate and deconstructed it.

Here is the Coles Notes version of their detailed analysis.

In 2003, Joseph DiMasi and a team of researchers from the Center for the Study of Drug Development at Tufts University in Boston published an article in the journal Health Economics titled The Price of Innovation: New Estimates of Drug Development Costs.

It concluded that the mean R&D cost for a new drug was $802-million in the year 2000. (The Pharmaceutical Research and Manufacturers of America, or PhRMA, later "updated" this figure to $1.32-billion in 2006 dollars.) Let's look at how they arrived at the final figure.

The researchers asked 24 large drug companies to submit R&D costs for "self-originated new chemical entities" - essentially new drugs developed in-house. Ten companies did so but on the condition that the data be kept confidential, meaning we don't know what companies or what drugs were included, or what exactly is included in R&D.

The researchers estimated that the "cost of discovery" - the time from the synthesis of a drug to animal testing - at $120.9-million. The larger cost was clinical trials, testing the safety and effectiveness of a new drug in humans, at $281.9-million. Add the two and you get the total "average out-of-pocket per new drug": $402.8-million.

Then Dr. DiMasi and his team calculated the "cost of capital" - essentially what this money would have earned if it had been invested in the stock market instead of in R&D. They used an annual return on investment of 11 per cent.

Applied over the time it takes for clinical trials and regulatory review - 72 months and 18 months respectively - that cost of capital brought the total R&D cost to $802-million.

The original paper said that it took an average 11.8 years to get a drug to market, including 52 months of preclinical research and the aforementioned 90 months for trials and regulatory approval.

Now, let's look at the critique, or what Dr. Light and Dr. Warburton dub "demythologizing the high cost of pharmaceutical research."

First, they note that drug companies have "tightly controlled access to verifiable facts" so there is no way of independently confirming their numbers. So let's assume they are essentially correct but analyze them through a prism of publicly available data.

First, there are not many novel drugs developed. Between 1990 and 2000 only 35 per cent of "new drugs" were actually new chemical entities (NCEs), according to the U.S. Office of Technology Assessment. Most new products are reformulations or recombinations of existing drugs - "me too" drugs in common parlance. Only 22 per cent of drugs developed in-house by pharmaceutical companies are NCEs.

That means the $802-million is, at best, an estimate of the R&D cost of the costliest one-fifth of drugs, not all drugs. The cost of "me too" drugs is necessarily a lot less.

The eyebrow-raising aspect of the original cost calculation is the whopping "cost of capital." While "costs forgone" is a legitimate calculation for accountants, the accepted standard is to assume an annual return on investment of 3 per cent in the United States and 5 per cent in Canada - not the 11 per cent used in the original cost calculation.

The "cost of capital" is massive because of the length of time it takes to get a drug to market. But the new paper suggests those estimates are off too.

According to the U.S. Food and Drug Administration Register, drug trials last, on average, 36 months, not 72 months, while regulatory review takes less than 12 months on average, not 18 months.

(The original study also said clinical trials involved 5,303 patients on average at a cost of $23,572. According to the U.S. National Institutes of Health, the average trial involves half that number at an average cost of $3,861.) Another controversial figure is the 52 months allocated for preclinical research; that number is virtually impossible to calculate - not to mention that basic research is often done in universities and government-sponsored labs. Yet it accounts for fully one-third of the $802-million estimate.

Finally, the new analysis notes that there are generous tax breaks for R&D and those were left out of the cost calculation. "A reasonable guess is that half of corporate R&D expenses are paid for by taxpayers over the long term," the authors write.

So, what do you get when you crunch all those numbers?

According to Dr. Light and Dr. Warburton, the net median R&D cost of developing a prescription drugs varies from $13-million to $204-million, depending on the kind of drug.

Over all, they estimate R&D costs $59.4-million for each new drug.

That is a far cry from $802-million or $1.3-billion.

Consumers who use prescription drugs, and the drug plans that are the principal purchasers, need to start questioning the "facts" and asking some tough questions.

If R&D costs are only a fraction of what is asserted, then what is the justification for high prescription drug prices?